Software-as-a-service model is maturing

Customers always want their software bug-free and free of charge. Anything less is a disappointment, according to Josh Greenbaum, a principle at Enterprise Applications Consulting.

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Although free software may never be widespread, when Salesforce.com opened the pricing door a crack with a model different from the standard perpetual-license model -- with its huge up-front costs -- customers rushed in and flung the door wide open.

The slow and steady transition to SaaS (software as a service) gives the enterprise something else it wants and needs: a fairly stable budget item. The per-user, per-month pricing model is a fixed cost. As such, it allows a company to predict what its expenses are going to be, says Tim Bajarin, chief analyst at Creative Strategies.

Companies are also looking for more flexibility. During the past six months, there appears to be a slow but not imperceptible movement toward other deployment models, accompanied by other pricing models.

The pure utility model, for example, is back, with fees based on actual use of processing power or disk storage. Why should companies that need to crunch numbers just once a quarter have to invest in expensive BI solutions when they can pay by the compute cycle?

Mark Clayman, CIO of application management provider NaviSite, believes the possibility for a company to try things out without making large capital investments is driving the uptake of the SaaS model and its many permutations. There always seem to be small- and medium-size short-duration projects; what could be better than adding the capacity -- and even the application itself --- on an ad hoc basis? This model can be attractive even if it is just to do a beta test of an idea, Clayman says.

The utility model also allows a company to show off its services, functionality, and capabilities, and engage with customers who would otherwise be hesitant to enter into a long-term commitment.

As a result, many companies are now agreeing to shorter and shorter terms -- even by the week. (Salesforce.com, however, is sticking to its minimum of a year contract, at least for the moment.)

What we are witnessing is the changeover from strict pricing orthodoxies, says EAC’s Greenbaum. As traditional pricing models fall by the wayside, vendors are starting to experiment with a mix of deployment and pricing models.

But for the major enterprise software companies, this will be a hard transition. “It is an enormous change to go from a one-time revenue model to a recurring model,” Clayman says -- and he’s right.

The proof is in the pudding. You can watch it in action as SAP and Oracle struggle with it, each offering its own hybrid model that is part old school and part new. SAP has something it calls “isolated tenancy” for its CRM on-demand solution, which allows SAP to price applications lower by using multi-tenancy for the basic software platform but single tenancy for the actual business processes. Oracle CRM On Demand uses the traditional per-user, per-month fee, but it also charges an additional up-front fee, like a perpetual license, if a customer opts for all Oracle applications, including its E-Business Suite, PeopleSoft, and JD Edwards, as well as its middleware infrastructure, on demand.

Salesforce.com paved the way and now other companies are tweaking the model. From a customer standpoint, it will be all good.